Industry Sees Recovery Ahead After Four Years of Gloom
The market recession has severely tested the confidence of the normally optimistic construction industry. Four years of struggling markets have taken a toll. However, the slow-but-steady recovery of the U.S. economy has many firms in the industry now believing that the worst is behind them and that a broad recovery is poised to begin.
The recovery of the industry’s optimism can be seen in the most recent ENR Construction Industry Confidence Index survey. The first-quarter 2012 CICI rose to 58 on a scale of 100, up 16 points from 42 in the last quarter. (A CICI rating of 50 would represent a stable market.) The 464 executives of large construction and design firms responding to the survey believe the market has stabilized and is beginning to show signs of recovery.
The CICI measures executive sentiment about the current market as well as projections for where it will be in the next three to six months and over a 12- to 18-month period. The index is based on responses to surveys sent out to more than 3,000 U.S. firms on ENR’s lists of the leading contractors, subcontractors and design firms. The latest results are based on a survey conducted from Feb. 22 to March 12.
The CICI also measures sentiment about the overall U.S. economy as a leading indicator of future trends in construction. In the first quarter, confidence in the U.S. economy rose to a CICI rating of 64, from 49 in the last quarter, showing that respondents in the industry believe the economy is on the right track.
Another sign of the industry’s optimism is that, while only 19% of respondents say the market is continuing to decline, 21% believe the market now is improving. While respondents are not ebullient about near-term prospects, 31% believe the market will improve in three to six months’ time, compared to 12% that believe it will still be in decline.
However, the industruy’s expectations for the market in 2013 may be cause for real excitement. Only 6% of respondents believe the market will continue to be in decline in 12 to 18 months, while 53% say it will be improving.
Private Sector To Lead Recovery
Applying the CICI formula to individual market sectors shows that respondents believe the private-sector markets will lead the recovery. The petroleum market is perceived to be the strongest, with a CICI rating of 76, followed by multi-unit residential and power, both at 71, and health care at 69.
The retail market, once the lowest-rated market, rose to a CICI rating of 51, showing some optimism that this sector finally has stabilized, while the commercial office market was rated at 47, up from 39 in the fourth quarter. The only market to fall was the entertainment and theme-park sector, which dropped a point to 41.
CFMA Survey: Cautious Optimism
The CICI findings parallel the soon-to-be-released results of the latest Confindex survey from the Construction Financial Management Association, Princeton, N.J. CFMA polls 200 CFOs from general contractors, subcontractors and civil contractors. (A Confindex rating of 100 indicates a stable market.) Higher ratings show growth is expected.
“Our Confindex rose from 116 to 126 [on a scale of 200] for the first quarter,” says Stuart Binstock, CEO of CFMA. However, the Confindex stood at 131 in the first quarter of 2011.
Binstock says the CFMA survey shows the industry is starting to become more confident. “We are seeing members begin to worry about future staff shortages and materials price increases as the market recovers, rather than just surviving,”
Binstock says.
CFMA members continue to be wary. “In the first quarter of 2011, all the indicators pointed to a general economic recovery. But then we were hit by the Japanese tsunami, the fight in Congress over the debt ceiling, the debt crisis in Greece and a falling stock market,” says Anirban Basu, CEO of Baltimore-based economic consultant Sage Policy Group Inc. and an economic adviser to CFMA.
This cascade of events led to a tightening of credit and a drop in construction prospects. “CFOs see real prospects of economic recovery now, but [they] remember the tumult of last year and are wary of being too exuberant,” Basu says.
However, as Basu points out, the economy is now adding as many as 200,000 jobs a month, and vacancy rates in many cities are beginning to fall. Such news bodes well for the industry.
ENR also asked whether respondents were experiencing increases in materials prices, and 71.1% said yes. Fuel and
petroleum-based products were among the most commonly cited. However, many respondents said they were seeing pricing pressure on steel, copper, concrete and drywall.
Only the financial conditions index lags behind the rest of the CFMA Confindex’s indicators, Binstock notes. He says that while most economic conditions point to a general recovery in the market, bank financing remains tight. Until project financing becomes more readily available, the recovery will be slow.
As part of the survey, ENR asked whether financing for projects is more or less available that it was six months ago. For the first time since the question was posed two years ago, survey respondents said project financing has stabilized. While only 16.6% said project financing has become tougher, 21.1% said access to capital now is easier.
“Capitalism thrives on capital,” says Basu. “CFOs see business conditions that are causing the demand for construction to rise, but until the banks free up capital for projects, market growth will only be in the 2% to 3% range.”
